Deemed Dividend: liquidator's loan not treated as a dividend

Is a loan made to a shareholder in the course of a members' voluntary winding-up of a private company by a liquidator taken to be a dividend under subsection 109D(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The private company is not taken to pay a dividend under subsection 109D(1) of the ITAA 1936 in relation to a loan made by a liquidator in the course of winding-up the company.

The taxpayer is a shareholder of the private company which is a proprietary company.

The private company is solvent and resolves by special resolution during the 2001-02 income year that it be wound up voluntarily.

The private company held a general meeting and appointed a liquidator for the purpose of winding-up the company. The liquidator is not a registered liquidator.

The liquidator made a loan to the taxpayer six months after the special resolution but still within the 2001-02 income year. No interest is payable in relation to the loan.

The taxpayer did not fully repay the loan by the end of the 2001-02 income year.

Under subsection 109D(1) of the ITAA 1936 an amount lent by a private company to a shareholder during the current year is taken to be a dividend if the loan is not fully repaid by the end of the current year, and Subdivision D of the ITAA 1936 does not prevent the private company from being taken to pay a dividend.

Subdivision D of Division 7A of the ITAA 1936 sets out rules about payments and loans that are not treated as dividends.

The loan to the taxpayer is not excluded under section 109N of the ITAA 1936 from being taken to be a dividend under section 109D of the ITAA 1936 as the rate of interest payable on the loan is nil.

Section 109NA of the ITAA 1936 provides that a private company is not taken under subsection 109D(1) of the ITAA 1936 to pay a dividend because of a loan made in the course of the winding-up of the company by a liquidator. The note to section 109NA of the ITAA 1936 highlights that if such a loan is not fully repaid by the end of the following year of income, the company will be taken to have paid a dividend under subsection 109D(1A) of the ITAA 1936.

In a members' voluntary winding up, the company in general meeting must appoint a liquidator (section 495 of the Corporations Act 2001 ). In a members' voluntary winding up of a proprietary company the liquidator does not need to be a registered liquidator (subsection 532(4) of the Corporations Act).

A loan will be accepted as a 'loan made in the course of the winding-up of the company by a liquidator' when it is made after the winding-up is taken to have begun under the Corporations Act.

For a voluntary winding-up this is generally taken to be on the day on which the company passed the special resolution resolving that it be wound up voluntarily (section 513B of the Corporations Act).

The liquidator of the private company made a loan to the taxpayer after the winding up of the company began. Section 109NA of the ITAA 1936 is satisfied since the loan was made to the taxpayer by the liquidator in the course of winding-up the company.

Accordingly, the private company is not taken to have paid a dividend to the taxpayer for the 2001-02 income year under subsection 109D(1) of the ITAA 1936.